The embattled Fresh & Easy Neighborhood Market faces yet another challenge: smaller format Walmart stores in its California heartland, says James Halliwell

It’s been another torrid few weeks for Fresh & Easy. But, like a cheap horror flick, just when you thought it was over the worst is yet to come.

As momentum gathered this week around the so-called ‘Tesco law’ the looming self-service alcohol ban currently awaiting a full vote by the California State Senate an even bigger threat is headed towards the loss-making chain’s heartland, in the shape of Walmart Express.

Two prototype Walmart Express stores opened this week in Gentry and Prairie Grove, near to Walmart’s HQ in Bentonville, Arkansas. That’s around 2,000 miles away from Fresh & Easy’s stronghold. But Walmart’s new smaller format stores both “Express” and the larger “Market” are reportedly headed for California, according to insider blog FreshNEasy Buzz, with the Golden State a “major focus” for Walmart’s new, smaller format stores.

Walmart is said to be targeting sites near existing Fresh & Easy stores in the metro Sacramento region, San Francisco Bay, Los Angeles and Orange County.

Since Tesco has focused its recent efforts on California only one of its 126 stores there have closed, while five stores in both Phoenix, Arizona and Las Vegas, Nevada were shuttered last November, to leave those outposts increasingly sparse and isolated the move by Walmart to target Tesco’s strongest market looks ­personal. It’s certainly not without form on this count, either, launching four ‘Marketside by Walmart’ stores in Phoenix, Arizona in August 2008.

While Marketside has struggled, the big-box retailer is determined to make a proper fist of smaller-format stores, and says it plans to open 30 to 40 Express stores this year and as many as 300 smaller-format stores by the end of 2012, including a second new format called Walmart Market, with an ­average footprint of 40,000 sq ft.

It’s basing its confidence in the new Walmart Express format on a new offer (see box) that bloggers likened to Walton’s Five and Dime stores in the 1950s, although ­pictures of the first stores (above) ­suggest the stores will look more like prisons.

So, will the arrival of Walmart in California deliver the final nail in Fresh & Easy’s coffin? Neil Saunders, a retail analyst at Verdict, believes “it is very unhelpful because the market will become more crowded, and Walmart is a slick ­operator.”

But while it isn’t great news for Tesco, it isn’t an open and shut case, he adds. “I don’t think Walmart arriving is the disaster some people will make it out to be. Walmart is not universally popular in the US, especially in local communities, ironically rather like Tesco in the UK.

“People will object to Walmart opening in the neighbourhood a big corporate giant able to undercut prices and put local shops out of business. And Walmart has ­trialled smaller formats for years and never got it quite right.”

According to US industry analyst Jim Prevor, it is not just the Express format that Tesco needs to worry about. “Walmart is under-represented in California with its supercenters, and when a supercenter opens in a Fresh & Easy region it affects them. The prospect of more supercenters is a bigger threat than what is currently only a hypothetical concept.”

Prevor also suggests the name “Express” may be more than just a coincidence. “Walmart has always been jealous at Tesco Express putting one over on Asda with smaller stores in the UK. I don’t think the name Express is an ­accident”.

How will Tesco respond? Group CEO Philip Clarke insists Fresh & Easy has loyal fans, but admits it needs more. A TV ad campaign is rumoured to be on the way. But the alcohol ban, if passed, would means expensive amendments to the operating model.

And that’s before Walmart lands on its doorstep.

Walmart Express

Format: 15,000 sq ft (vs 10,000 sq ft for Fresh & Easy)
Offer: Fresh and fresh-prepared foods, frozen foods and packaged groceries, health and personal care items, toys, clothing, office supplies, household goods, CDs and DVDs, pre-paid phones, clothing, in-store pharmacies, petrol forecourts
Plans: 30 to 40 stores by December; 300 Express and Walmart Market stores by the end of 2012